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CD Equisearch Pvt Ltd May 26,2015

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* adjusted for market value of quoted equity sitting in the books

Atul Ltd

No. of shares (crore) 2.97

Mkt cap (Rs crs) 3427

Current price (25/05/2015) 1156

Price target (Rs)

1600

52 week H/L (Rs.) 1515/785

Book Value* (Rs.) (fv:10) 460

P/BV (16e/17e)

2.2/1.9

P/E (16e/17e) 13.6/11.6

EPS growth (FY15/16e/17e) 13.8/11.6/17.3

ROE (FY15/FY16e/FY17e) 24.1/22.0/21.3

Beta 0.8

Daily volume (avg. monthly) 24748

BSE Code 500027

NSE Code ATUL

Bloomberg ATLP IN

Reuters ATLP.BO

Shareholding pattern % Promoters 50.7

MFs / Banks / FIs 12.7

Foreign 7.2

Non-Promoter Corp. 4.4

Public & others 25.1

Total 100.0

As on Mar 31, 2015

Recommendation

BUY

Analyst

KISHAN GUPTA, CFA, FRM

Phone: + 91 (33) 4488 0043

E- mail: [email protected]

Consolidated figures (Rs crs)

FY13 FY14 FY15 FY16e FY17e

Income from operations 2042.88 2457.75 2656.39 2949.80 3312.32

Other Income 16.62 36.27 10.25 12.99 13.43

EBITDA (other income included) 271.11 400.00 411.54 447.16 512.27

Net Profit after MI & EO item 115.52 198.95 226.44 252.74 296.50

EPS (Rs) 38.95 67.08 76.35 85.21 99.97

EPS growth (%) 27.0 72.2 13.8 11.6 17.3

Company Brief Atul Ltd manufactures value added chemicals by blending basic chemicals

and natural resources for diverse industries -agriculture, construction,

textiles, pharmaceuticals and automobiles - from its plants in Valsad,

Bharuch (Gujarat) and Thane (Maharashtra).

Quarterly Highlights

� Atul's net sales declined 12.1% to Rs 606 crs last quarter as sale of life

science chemicals slid 23% to Rs 151 crs. Performance and other

chemicals though reported marginal increase in sales. Operating

margins tumbled 200 bps to 13%, the lowest in last eight quarters not

least because of sharp fall in crude oil prices which has affected the

realizations of crude oil based finished products ( read: polymers,

aromatics etc). Moderation in financial expenses and taxes helped

contain fall in net profit to 13% last quarter.

� Stress in crop protection business, whose revenues shriveled by some

20% last fiscal, led the fall in standalone annual profits (read EBIT) of

life science chemicals business (Rs 119 crs vs Rs 150 crs in FY14). EBIT

margins shrunk by nerve wracking 270 bps to 17.6% compared to

20.3%. On the contrary, the performance and other chemicals reported

expansion in margins in each of the last four quarters, thus taking the

total annual increase to 210 bps.

� Standalone sales of performance and other chemical business too

increased by 17% last fiscal driven gravity defying growth in aromatics

and colors business (estimated to have grown by at least 20%). Sharp

fall in crude oil prices took the sheen off the polymers business for its

raw materials are mainly crude oil derivatives.

� Despite stress in realizations of finished products, Atul yet managed to

report 13.8% increase in consolidated net profit to Rs 226 crs compared

to 199 crs in fiscal ended 2014. It also reversed accumulated loss

amounting Rs 14.21 crs related to an investment of an associate

company.

� The stock currently trades at 13.6x FY16e EPS of Rs 85.21 and 11.6x

FY17e EPS of Rs 99.97. We maintain a buy rating on the stock with

price target of Rs 1600 (previous target: Rs 1706) based on 16x FY17e

earnings over a period of 9-12 months. (For more info, please refer to

our report dated Dec 23, 2104)

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CD Equisearch Pvt Ltd


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Outlook & Recommendation

American Chemistry Council Outlook

According to Year End 2014 Chemical Industry Situation and Outlook published by The American Chemistry Council (ACC),

global chemistry production volumes would grow by 3.6% in 2015 and 3.9% in 2016 (previous estimate: 4.1% for each of the two

years) driven by robust growth in developing nations of Asia-Pacific and Africa & the Middle East. US too would grow at a fast

clip (3.7% in 2015 and 3.9% in 2016) not least due to dollar appreciation coupled with increased supply of unconventional oil

and gas putting downward pressure on oil prices. Strong growth is expected in inorganic chemicals, organic chemistry, plastic

resins and synthetic rubber as export markets revive and domestic end-use markets further improve. The US chemistry growth

is estimated to surge to 4% in the second half of the current decade, outstripping the growth of overall US economy.

Yet near term challenges looms for Western Europe, Japan and Latin America. ACC reckons that with strengthening production

volumes global capacity utilization would improve too. It forecasts global chemical industry capital investment to reach $592 bn

by 2019, a level more than twice than what it was in 2009. By 2019, U.S. capital spending by the chemical industry will reach

$48.6 billion - more than double the level of spending at the start of 2009.

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Growth drivers

Given uncertainty in crude oil market, we expect Atul to report another year of modest growth. Despite some stress in the

polymer and crop protection businesses in the short term, other businesses such as colors and aromatics would stay the

course. Sparked by robust growth in high performance pigments, digital printing inks and textile chemicals, the colors

business would report sales growth in mid to high teens over the next few years. Capacity debottlenecking of Vat dyes and

intermediates would also help to boost volume growth.

Realizing the potential of Indian epoxy market, Atul has planned to increase its market share in select epoxy hardeners;

needless to mention about its strategy to augment sale of high margin products. According to industry reports, Indian epoxy

market is estimated to grow by 8-9% annually over the next five years, precipitated by its increasing applications in paints &

coatings, civil construction, adhesives et. al

Product launches

To rev up its sales, Atul plans to launch value added products across its product portfolios. Apart from introducing value

added downstream products, the aromatics business would expand product portfolio of personal care and flavors & fragrance

industries. To come out of sluggishness, crop protection business would unveil new products coming off-patent besides

expanding brand business pan -India. It also plans to enter into new business segments - plant growth regulators and seeds.

Other businesses such as bulk chemicals and polymers either plan to introduce high margin products or reveal downstream

products.

Risks

Despite its presence in several businesses, Atul still suffers from high vulnerability in earnings. Most notably, realizations in

its polymers and aromatics get impacted by volatility in raw material prices, mainly from derivatives of crude oil. For colors

business, volatility in prices of intermediates and lower demand for niche Vat dyes pose serious threats. Its crop protection

business not only gets plagued by vagaries of monsoon but also increased competition (read: entry of international generic

companies). One of the most resilient businesses, pharmaceuticals and intermediates, is also not left untouched from external

risks: ever-rising regulatory requirements in developed countries.

For aromatics, where Atul enjoys significant global market share in

several products - p-Cresol; p-AA; p-AA1; p-Cd- diverse product

portfolio in antioxidants, flavors & fragrance ingredients, personal care

and pharmaceutical & dyes intermediates would provide unparalleled

opportunity; revenues estimated to grow by 12-15% over the next two

years. For the pharmaceutical business, Atul has chalked out a

multipronged strategy: grow sales in Japan and select European

countries; enter new markets like Russia, Iran and Korea; boost CRAMS

business with strategic customers; resort to inorganic route to expand

business.

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Capex

After having spent Rs 125 crs in FY15, Atul has announced that projects

entailing investment of Rs 330 crs - potential to generate sale of nearly Rs

800 crs- are in progress. It commissioned several new products last fiscal,

including bulk actives plant, intermediate expansion project for contract

manufacturing of crop protection products and BLR project (polymers).

Other worth noting projects commissioned last fiscal include solvent

recovery plant for colors business, formulation facility for digital inks, pilot

plant for high performance pigments and plant for RF resins. In current

fiscal, Atul would complete modernization / expansion of caustic plant,

epoxy resins and formulations, epoxy hardeners and intermediates and

reactive diluents.

Financials & valuation

With meltdown in crude oil prices last fiscal, Atul’s overall revenues took a knock as realizations of polymers, aromatics

and bulk chemicals were impacted. Standalone performance & other chemicals revenue growth pummeled from 29% in

first half to just 6.7% in the second, resulting in 16.4% annual growth. After having seen revenues declining 15% in the

second half of last fiscal, Life Science Chemicals business appears to have scraped the bottom and could grow at high single

digit over the next few years. Barring crop protection business, maintaining margins in other businesses won’t be as

challenging not least because of strong pricing power in aromatics and colors businesses.

Most of free cash flows (at the firm level) would be used to retire debt which would cut down the financial expenses and

boost coverage ratios. Gradual progress in capex program and muddled outlook of the crude oil market would limit rise in

asset turnover ratios. Yet moderate rise in margins would keep the fall in return on capital ratios under check.

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Cross Sectional Analysis

Company Equity* CMP Mcap* Sales* Profit* OPM NPM

Int.

coverage ROE

Mcap/

sales P/BV P/E

Aarti Inds. 44 327 2895 2908 206 10.4 7.1 2.8 21.8 1.0 2.8 14.1

Atul Ltd 30 1156 3427 2656 226 15.1 8.5 13.7 24.1 1.3 3.3 15.1

BASF India 43 1075 4653 4706 -96 2.8 -2.0 0.3 - 1.0 4.0 -

Sudarshan Chem 14 103 711 1083 45 11.0 4.1 2.9 16.8 0.7 2.4 15.8

TTM P/E; * Figures in Rs crs;

Companies in the exhibit not exactly comparable as their product portfolios are dissimilar.

The stock currently trades at 13.6x FY16e EPS of Rs 85.21 and 11.6x

FY17e EPS of Rs 99.97. Shortfall in last fiscal's earnings has prompted

us to cut back our current fiscal earnings estimates by 15%. Business

risks looms for the sharp meltdown in crude oil prices could make

matters worse. Yet the current valuation provides safety from innate

risks, not counting uptick in earnings from sharp recovery in crude oil

prices. We, therefore maintain a buy rating on the stock with price

target of Rs 1600 (previous target: Rs 1706) based on 16x FY17e

earnings over a period of 9-12 months. (For more info, please refer to

our report dated Dec 23, 2104).

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Financials

Standalone Quarterly Results Figures in Rs crs

Q4FY15 Q4FY14 % chg. FY15 FY14 % chg.

Income from operations 619.04 667.99 -7.3 2555.65 2365.45 8.0

Other Income 1.37 0.34 302.9 15.31 39.62 -61.4

Total Income 620.41 668.33 -7.2 2570.96 2405.07 6.9

Total Expenditure 538.33 568.05 -5.2 2179.93 2022.32 7.8

EBITDA (other income included) 82.08 100.28 -18.1 391.03 382.75 2.2

Interest 5.49 9.25 -40.6 23.64 31.43 -24.8

Depreciation 14.20 17.30 -17.9 55.28 54.23 1.9

PBT 62.39 73.73 -15.4 312.11 297.09 5.1

Tax 17.53 22.17 -20.9 94.69 84.30 12.3

PAT 44.86 51.56 -13.0 217.42 212.79 2.2

Extraordinary Item - - - - 19.86 -100.0

Adjusted Net Profit 44.86 51.56 -13.0 217.42 192.93 12.7

EPS (F.V. 10) 15.12 17.38 -13.0 73.30 65.05 12.7

Segment Results Figures in Rs crs

Q4FY15 Q4FY14 % chg. FY15 FY14 % chg.

Segment Revenue

Life Science Chemicals 151.27 196.62 -23.1 675.97 738.26 -8.4

Performance & Other Chemicals 494.74 492.49 0.5 2008.40 1696.08 18.4

Sub Total 646.01 689.11 -6.3 2684.37 2434.34 10.3

Inter - Segment Revenue 40.20 41.04 -2.0 173.95 127.82 36.1

Net Segment Revenue 605.81 648.07 -6.5 2510.42 2306.52 8.8

Segment EBIT

Life Science Chemicals 23.81 39.55 -39.8 118.77 149.67 -20.6

Performance & Other Chemicals 56.80 53.96 5.3 241.66 173.38 39.4

Sub Total 80.61 93.51 -13.8 360.43 323.05 11.6

Interest 5.49 9.25 -40.6 23.64 31.43 -24.8

Other Unallocable Exp. (net of income) 12.73 10.53 20.9 24.68 -5.47 -551.2

PBT 62.39 73.73 -15.4 312.11 297.09 5.1

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Consolidated Income Statement Figures in Rs crs


Income from operations 2042.88 2457.75 2656.39 2949.80 3312.32

Growth (%) 14.0 20.3 8.1 11.0 12.3

Other Income 16.62 36.27 10.25 12.99 13.43

Total Income 2059.50 2494.02 2666.64 2962.79 3325.75

Total Expenditure 1788.39 2094.02 2255.10 2515.63 2813.48

EBITDA (other income included) 271.11 400.00 411.54 447.16 512.27

Interest 33.37 33.44 25.69 21.30 15.49

EBDT 237.74 366.56 385.85 425.86 496.78

Depreciation 51.37 58.26 60.27 65.25 73.64

Tax 58.30 88.09 99.37 108.18 126.94

Net profit 128.07 220.21 226.21 252.42 296.19

Minority interest 0.07 -0.26 -0.17 -0.25 -0.25

Profit/loss of associate -8.23 -1.28 14.27 0.06 0.06

Net profit after MI 119.77 219.19 240.65 252.74 296.50

Extraordinary item 4.25 20.24 14.21 - -

Adjusted Net Profit 115.52 198.95 226.44 252.74 296.50

EPS (Rs.) 38.95 67.08 76.35 85.21 99.97

Segment Results Figures in Rs crs


Segment Revenue

Life Science Chemicals 707.33 759.44 700.21 750.86 820.86

Performance & Other Chemicals 1297.69 1636.80 1905.96 2143.69 2430.69

Others 0.00 2.10 4.77 5.25 5.77

Net sales 2005.02 2398.34 2610.94 2899.80 3257.32

Segment EBIT

Life Science Chemicals 138.25 153.57 123.86 127.65 143.65

Performance & Other Chemicals 87.15 184.34 254.99 282.97 328.14

Others 0.00 -1.22 -1.14 -1.10 -1.00

Sub Total 225.40 336.69 377.71 409.51 470.79

Interest 33.37 33.44 25.69 21.30 15.5

Other Unallocable Exp. (net of income) 5.66 -5.05 26.44 27.61 32.2

PBT 186.37 308.30 325.58 360.61 423.13

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Balance Sheet Figures in Rs crs

FY13 FY14 FY15e FY16e FY17e

SOURCES OF FUNDS

Share Capital 29.68 29.68 29.68 29.68 29.68

Reserves 724.56 918.94 1009.31 1232.49 1497.65

Total Shareholders Funds 754.24 948.62 1038.99 1262.17 1527.33

Minority Interest 5.84 5.92 5.68 5.43 5.18

Long term debt 164.36 119.49 58.57 28.62 9.41

Total Liabilities 924.44 1074.03 1103.24 1296.22 1541.92

APPLICATION OF FUNDS

Gross Block 1190.31 1292.86 1303.01 1463.47 1648.47

Less: Accumulated Depreciation 663.15 701.56 748.02 813.00 886.37

Impairment 21.03 21.03 21.03 21.03 21.03

Net Block 506.13 570.27 533.97 629.44 741.07

Capital Work in Progress 65.93 59.08 91.74 90.00 50.00

Investments 66.71 62.82 66.05 66.11 66.17

Current Assets, Loans & Advances

Inventory 366.48 434.17 415.27 473.41 530.22

Sundry Debtors 351.68 437.08 442.42 495.51 564.88

Cash and Bank 14.86 21.05 36.73 26.91 51.28

Other Assets 119.34 140.31 143.84 146.84 150.14

Total CA & LA 852.36 1032.61 1038.26 1142.66 1296.52

Current liabilities 570.79 638.91 594.71 588.31 553.92

Provisions 36.24 33.66 43.56 45.35 47.13

Total Current Liabilities 607.03 672.57 638.27 633.66 601.05

Net Current Assets 245.33 360.04 399.99 509.01 695.46

Net Deferred Tax -27.28 -37.09 -46.09 -60.11 -78.00

Other Assets (Net of liabilities) 67.62 58.91 57.58 61.77 67.22

Total Assets 924.44 1074.03 1103.24 1296.22 1541.92

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Cash Flow Statement Figures in Rs crs


Net Income (a) 128.07 220.21 226.21 252.42 296.19

Non cash exp. & others (b) 60.49 49.02 60.31 69.52 81.34

Depreciation 51.37 58.26 60.27 65.25 73.64

Investment income -3.70 -24.52 -4.88 -5.09 -5.09

Others 12.82 15.28 4.92 9.35 12.78

(Increase) / decrease in NWC (c) -35.19 -150.82 -50.75 -81.26 -83.28

Inventory -33.33 -67.69 18.90 -58.14 -56.81

Debtors 2.60 -91.92 -5.34 -53.09 -69.37

Payables 27.75 34.26 -52.91 27.22 35.93

Other assets (net) -32.21 -25.47 -11.40 2.75 6.97

Operating cash flow (a+b+c) 153.37 118.41 235.76 240.68 294.25

Capex (net of sale) -103.86 -113.82 -126.66 -158.26 -145.00

Investment income 3.70 24.52 4.88 5.09 5.09

Others -15.58 6.24 -0.60 2.57 2.57

Investing cash flow (d) -115.74 -83.06 -122.38 -150.60 -137.34

Net borrowings -28.73 -6.94 -71.61 -69.56 -100.41

Dividends paid -15.46 -20.67 -26.10 -30.34 -32.13

Others 0.14 0.43 0.00 0.00

Financing cash flow (e) -44.05 -27.18 -97.71 -99.90 -132.53

Net change (a+b+c+d+e) -6.42 8.17 15.68 -9.83 24.37

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Key Financial Ratios


Growth Ratios

Revenue (%) 14.0 20.3 8.1 11.0 12.3

EBIDTA (%) 22.0 43.3 8.4 8.7 14.6

Net Profit (%) 27.0 72.2 13.8 11.6 17.3

EPS (%) 27.0 72.2 13.8 11.6 17.3

Margins

Operating Profit Margin (%) 12.2 14.8 15.1 14.7 15.1

Gross Profit Margin (%) 11.3 14.1 14.5 14.4 15.0

Net Profit Margin (%) 6.1 8.1 8.5 8.6 8.9

Return

ROCE (%) 15.0 20.6 19.1 18.8 19.4

RONW (%) 19.5 26.8 24.1 22.0 21.3

Valuations

Market Cap / Sales 0.4 0.5 1.3 1.2 1.0

EV/EBIDTA 4.0 3.7 7.8 7.4 6.5

P/E 7.8 6.5 14.8 13.6 11.6

P/BV 1.1 1.3 2.5 2.2 1.9

Other Ratios

Interest Coverage 6.4 9.6 13.7 17.9 28.3

Debt-Equity Ratio 0.6 0.4 0.3 0.2 0.1

Current Ratio 1.4 1.5 1.6 1.8 2.2

Turnover Ratios

Fixed Asset Turnover 5.6 5.7 5.3 5.1 4.8

Total Asset Turnover 2.7 2.8 2.6 2.5 2.3

Debtors Turnover 5.8 6.2 6.0 6.3 6.2

Inventory Turnover 5.1 5.2 5.3 5.7 5.6

Creditors Turnover 6.4 6.8 7.6 8.8 8.9

WC Ratios

Debtor Days 63.5 58.6 60.4 58.0 58.4

Inventory Days 71.4 69.8 68.7 64.5 65.1

Creditor Days 57.2 53.6 48.2 41.5 41.2

Cash Conversion Cycle 77.7 74.8 81.0 81.0 82.4

Cash Flows (Rs crs)

Operating Cash Flow 153.4 118.4 235.8 240.7 294.2

FCFF 74.0 57.1 132.0 102.4 165.2

FCFE 21.9 26.7 42.4 17.9 53.9

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